Eric Garcetti's Plan To Cut Business Tax Draws Criticism Over Claim That It Will Boost Revenue

Councilman Eric Garcetti, who is running for mayor, has been pushing for a total repeal of the city's business tax. The tax brings in roughly $425 million every year, and is much loathed by the Chamber of Commerce and other business groups.

Because this is municipal government we're talking about, you can't just repeal the tax. First, you have to form a committee. Garcetti did that, and in September the committee came back with a startling conclusion: Eliminating the business tax would actually increase revenue -- by $179 million in the average case.

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Sound too good to be true?

This claim should be familiar. It's a version of the Laffer curve argument, which holds that tax cuts can pay for themselves by stimulating growth.

It's not a surprise to see the Chamber of Commerce buy into this. But it is strange to see Garcetti do it. He's a liberal. Why is he signing onto some supply-side fantasy?

Garcetti's committee, the Business Tax Advisory Committee, hired USC professor Charles Swenson to analyze various changes to the tax. Swenson (who was given a $50,000 city contract) came up with what he calls a "fairly innovative methodology" for forecasting the "indirect" effect of cutting the business tax on other city revenues, such as taxes on property, sales, hotel rooms, and so on.

The result, cited in the BTAC report, is that eliminating the business tax would generate $423 million in "indirect" revenues in the worst-case scenario. So figure in the $425 million revenue loss, and it's a wash. In the average case, it would bring in $604 million. And in the best case, it would generate $688 million. Wow! (A note of caution, though. Swenson does give himself a 30% margin of error. But still: Wow!)

At its Sept. 14 meeting, Garcetti thanked the committee for its hard work, and said that the Swenson study "gets us down the road to assure people who are worried about the bottom line that this can be done."

According to the minutes of the meeting, he also called the business tax a "job killer," and said the time has come to issue "a bold call to arms" to eliminate it.

"There is no more space for a discussion if this should be done or not," he said.

This week, the Swenson report made its first contact with reality, in the form of a skeptical report from the city administrative officer and the chief legislative analyst. The report cited Christopher Thornberg, founder of Beacon Economics, who called the study "so flawed as to really provide no guidance on this issue."

In an interview, Thornberg was only too happy to expand on that thought. "His paper is a disaster," Thornberg said. "Spending 20 minutes, I found three major flaws in the analysis, all of which substantially bias the analysis upwards. So either A) He's not very good at doing these studies, or B) he's twisting the study."

Thornberg also noted that if the city's business tax goes down, the city will become marginally more attractive to businesses, and commercial rents will go up -- which would offset the impact on a company's bottom line.

"The only people that would be happy about getting rid of the gross receipts tax would be the landlords," Thornberg said. "This concept that you're going to create so much more business activity -- it's nonsense."

Surely Swenson, who has a Ph.D in this, would like to offer some response. Reached in his office earlier this week, he said he was too busy to talk. He was subsequently unreachable.

What about Garcetti? Does he stand by Swenson's work? Here's where it gets really squirrelly.

"We're not backing it nor retreating from it," said Yusef Robb, Garcetti's spokesman.

Regardless of whether the study is correct or not, Robb said Garcetti still wants to eliminate the tax.

"We want to get this done," Robb said. "It's a matter of how we get it done."

To figure that out, Garcetti wants -- wait for it -- another study.

"The Ph.D's have their models," Robb said. "The policymakers have to come up with a plan."

BTAC has been meeting for the past two years. Its report, which looks an awful lot like a plan, calls for a four-year phase-out of the tax. But now they need a second study, from the Office of Economic Analysis, which will farm it out to some other consultant with a Ph.D.

How long will that take? Robb won't say. At a Jobs Committee meeting on Wednesday, Garcetti stressed the "urgency" of repealing the tax, citing the city's high unemployment rate. But he has not imposed any deadlines on this process. He's termed out in 2013, and his office can't guarantee the tax will be repealed by then.

By now, we're pretty far up to our necks in b.s., so let's shower off for a second and consider the political implications.

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If the tax is still on the books in 2013 -- and all signs are that it will be -- then it'll make for a great issue in the mayoral campaign. Garcetti will be able to pitch himself to the business community as a diehard opponent of the tax. He'll also have outflanked Austin Beutner, the private equity baron who is the more natural Chamber of Commerce candidate. Beutner has said he's against repealing the business tax unless there is revenue to replace it.

In the real world, replacing the lost revenue would require raising other taxes, which would probably require a citywide election. Good luck, in this climate, getting the voters to go for that.

That leaves two choices. Find $425 million in cuts. (Gulp.) Or pretend that there will be no lost revenue.